Bank of Japan said Monday it was doubling a dollar swap to 120 billion dollars as part of the latest coordinated action by the world's central banks to contain a global market meltdown.The Japanese central bank said it held an emergency policy board meeting at which it agreed to pour up to 120 billion US dollars onto the money markets through April.It had agreed on September 18 to a swap facility of up to 60 billion dollars through January.The Bank of Japan said it was taking action in response to "continued strains" on money markets due to the turmoil on Wall Street.
"Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures," a Bank of Japan statement said.The central bank said it kept interest rates unchanged at 0.5 percent at the special meeting.The US Federal Reserve and European Union are part of the latest global effort, the Bank of Japan said.
The central banks of Australia, Britain, Canada, Denmark, Norway, Sweden and Switzerland are also taking part, it said.
The latest European and International business, finance, economic and political news, comment and analysis from Euroland on Credit default swaps,financial Markets.
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Tuesday, 30 September 2008
European governments announced a flurry of bank bailouts from Germany to Iceland
European governments announced a flurry of bank bailouts from Germany to Iceland, but the rescue deals only heightened fears that the contagion from the U.S. credit crisis has much further to spread before the financial system recovers.European shares fell heavily Monday and money markets remained frozen with banks refusing to lend to each other for all but the shortest periods amid concern that a planned U.S. government $700 billion bailout package would not be enough to stem the crisis.
A few hours later, the U.S. House defeated the rescue package by a vote of 228-205, but lawmakers were expected to reconvene Thursday in hopes of a quick vote on a reworked version."In the near term, it will be the weak ones that will be picked off," Global Insight chief European economist Howard Archer said before the U.S. congressional vote of the expectation that more banks would collapse or need rescue.
"But, obviously, the more the turmoil and dislocation continues, the further this could spread," he added. "We live in vicious times."
A few hours later, the U.S. House defeated the rescue package by a vote of 228-205, but lawmakers were expected to reconvene Thursday in hopes of a quick vote on a reworked version."In the near term, it will be the weak ones that will be picked off," Global Insight chief European economist Howard Archer said before the U.S. congressional vote of the expectation that more banks would collapse or need rescue.
"But, obviously, the more the turmoil and dislocation continues, the further this could spread," he added. "We live in vicious times."
National City (NCC, Fortune 500) shares plunged as much as 67% Monday, falling as low as $1.25 each,
National City insists it isn't about to follow in the footsteps of Wachovia and Washington Mutual. But the events of the past week suggest the bank's depositors are the ones who will make that decision. National City (NCC, Fortune 500) shares plunged as much as 67% Monday, falling as low as $1.25 each, as investors bet the Cleveland-based lender will be the next financial firm to fail.
Russian stocks fell sharply Monday, joining a broad sell-off in emerging markets
Russian stocks fell sharply Monday, joining a broad sell-off in emerging markets, as tumbling oil prices and mounting worries about the global financial crisis pushed the RTS stock index down 7%.
In Moscow, the dollar-denominated RTS stock index fell 7.1% to end at 1,194 points. The ruble-denominated Micex stock index dropped 5.5% to finish at 1,019 points.
After the close of trading in Moscow, the U.S. House of Representatives rejected the $700 billion bailout plan for the financial sector, sending U.S. equities into a free fall.
In Moscow, the dollar-denominated RTS stock index fell 7.1% to end at 1,194 points. The ruble-denominated Micex stock index dropped 5.5% to finish at 1,019 points.
After the close of trading in Moscow, the U.S. House of Representatives rejected the $700 billion bailout plan for the financial sector, sending U.S. equities into a free fall.
Turmoil in the European economy undercut the euro and the pound.Hypo Real Estate Holding AG going under
Turmoil in the European economy undercut the euro and the pound. The 15-nation currency fell to $1.4468 in New York, down from $1.4615 on Friday.
The British pound was quoted at $1.8160, down from $1.8417. And the Japanese yen fell to ¥104.43 from ¥106.14. The dollar's strength comes as the crisis on Wall Street appears to be spreading to the European financial system. In Germany, government regulators and several banks tossed a multibillion euro line of credit to Hypo Real Estate Holding AG in move aimed at preventing the country's second largest commercial property lender from going under. Meanwhile, the British government announced plans to nationalize troubled mortgage lender Bradford & Bingley, taking over the bank's $91 billion mortgage and loan books, in a bid to help stabalize the country's financial system.Over the weekend, the governments of Belgium, the Netherlands and Luxembourg partially nationalized Dutch-Belgian banking giant Fortis NV with a $16.4 billion rescue after investor confidence in the bank evaporated last week.The news from Europe "made the market aware that the contagion was not just in the U.S.," said Amo Sahota, chief currency analyst at U.K.-based HiFX plc.
But the currency market's focus shifted to the United States later Monday after the government's proposed $700 billion intervention in the financial system fell short of the needed votes in the House of Representatives.
"Now all eyes are back on the U.S.," Sahota said.While the bailout's defeat raises serious questions about the future of the U.S. economy, the dollar did not weaken substantially following news of the vote.The stock market, however, was hit particularly hard by the bailout delay. The Dow Jones industrial average plummeted 777 points, marking the index's steepest one-day point drop ever.
The gridlock in Washington, "leaves us right where we were before," Sahota said.
"And that is: still confused about whether there's going to be any positive resolution," to the government's plan for combating the crisis on Wall Street.
Lawmakers were widely expected to pass the bailout plan, and Monday's setback caught many market participants by surprise."The conventional wisdom was that legislation would be passed by the end of the week," said Stephen Malyon, currency analyst at Scotia Capital in Toronto.Congress' failure to pass the legislation has prompted some speculation that the Federal Reserve will take steps to prevent further damage to the financial system, Malyon said
The British pound was quoted at $1.8160, down from $1.8417. And the Japanese yen fell to ¥104.43 from ¥106.14. The dollar's strength comes as the crisis on Wall Street appears to be spreading to the European financial system. In Germany, government regulators and several banks tossed a multibillion euro line of credit to Hypo Real Estate Holding AG in move aimed at preventing the country's second largest commercial property lender from going under. Meanwhile, the British government announced plans to nationalize troubled mortgage lender Bradford & Bingley, taking over the bank's $91 billion mortgage and loan books, in a bid to help stabalize the country's financial system.Over the weekend, the governments of Belgium, the Netherlands and Luxembourg partially nationalized Dutch-Belgian banking giant Fortis NV with a $16.4 billion rescue after investor confidence in the bank evaporated last week.The news from Europe "made the market aware that the contagion was not just in the U.S.," said Amo Sahota, chief currency analyst at U.K.-based HiFX plc.
But the currency market's focus shifted to the United States later Monday after the government's proposed $700 billion intervention in the financial system fell short of the needed votes in the House of Representatives.
"Now all eyes are back on the U.S.," Sahota said.While the bailout's defeat raises serious questions about the future of the U.S. economy, the dollar did not weaken substantially following news of the vote.The stock market, however, was hit particularly hard by the bailout delay. The Dow Jones industrial average plummeted 777 points, marking the index's steepest one-day point drop ever.
The gridlock in Washington, "leaves us right where we were before," Sahota said.
"And that is: still confused about whether there's going to be any positive resolution," to the government's plan for combating the crisis on Wall Street.
Lawmakers were widely expected to pass the bailout plan, and Monday's setback caught many market participants by surprise."The conventional wisdom was that legislation would be passed by the end of the week," said Stephen Malyon, currency analyst at Scotia Capital in Toronto.Congress' failure to pass the legislation has prompted some speculation that the Federal Reserve will take steps to prevent further damage to the financial system, Malyon said
1930s style bank run...... collapse of the financial system
OUTCOMES collapse of the financial system
1930s style bank run...... collapse of the financial system
The bail out was based on a single assumption; the level of toxic debt was so large that much of the US banking system could no longer function. Stripped to its core, this amounts to saying that many banks were effectively insolvent.
It then follows that if anyone has any uninsured deposits in a US bank, then it would be prudent to take them out. This simple logic means a widespread run on banks, a collapse of the financial system, which in turn will be followed by a huge contraction of economic activity.However, there is an ironic twist to this scenario. As banks go bust, the Federal Deposit Insurance Corporation comes in and takes on the assets of failed banks. The government may end up with much of this toxic debt anyway....Banks write off the debt and move on....Perhaps, Wall Street was exaggerating about toxic debt. It really was an attempt by banks to push their losses onto the public sector. In reality, banks could have absorbed these losses all along.The Republicans saw through this scam and voted it down. With today's vote, banks will now get serious about writing off toxic debt and within a few weeks, the worst will be over.
...and anywhere in betweenThose are the two end points of the spectrum of possible outcomes. My feeling is that we are closer to the first point.
1930s style bank run...... collapse of the financial system
The bail out was based on a single assumption; the level of toxic debt was so large that much of the US banking system could no longer function. Stripped to its core, this amounts to saying that many banks were effectively insolvent.
It then follows that if anyone has any uninsured deposits in a US bank, then it would be prudent to take them out. This simple logic means a widespread run on banks, a collapse of the financial system, which in turn will be followed by a huge contraction of economic activity.However, there is an ironic twist to this scenario. As banks go bust, the Federal Deposit Insurance Corporation comes in and takes on the assets of failed banks. The government may end up with much of this toxic debt anyway....Banks write off the debt and move on....Perhaps, Wall Street was exaggerating about toxic debt. It really was an attempt by banks to push their losses onto the public sector. In reality, banks could have absorbed these losses all along.The Republicans saw through this scam and voted it down. With today's vote, banks will now get serious about writing off toxic debt and within a few weeks, the worst will be over.
...and anywhere in betweenThose are the two end points of the spectrum of possible outcomes. My feeling is that we are closer to the first point.
Banks have lost faith in the soundness of other banks
Banks have lost faith in the soundness of other banks, so they won't lend each other money. The American people have no faith in their president and Congress, so they are carpet-bombing those same members of Congress with e-mails warning them not to support a $700 billion bailout of the banks.
The members of Congress, who don't trust the president, the secretary of the Treasury and the chairman of the Federal Reserve, and who are worried that a vote for the bailout would be political suicide a month before an election, voted the bailout down 228-205 Monday.
But make no mistake. If Congress is unwilling to pass a bailout that might restore faith in the financial markets, it will plunge the United States deeper into the abyss of the unknown.
So, yes, a $700 billion bailout would be a leap of faith. No one can guarantee that it will work. No one can honestly promise that it will free up credit or that the Treasury will get all of the public's money back if it buys up distressed securities and holds them for a couple of years while financial experts try to figure out what they are worth. Nothing is certain.
But doing nothing looks worse. Already, three Wall Street investment banks have failed, and two others will become commercial banks. The U.S. government has nationalized Fannie and Freddie. Washington Mutual has become the largest bank failure inU.S. history, and Wachovia almost followed Monday. What more evidence do the American people need?
Need it or not, they are going to get it. After the House vote Monday, the Dow plunged 780 points, the largest single-day loss in history and a 7 percent decline. The Nasdaq and S&P 500 did even worse, each losing about 9 percent.
If this kind of bloodletting continues, and more huge banks collapse, maybe the House will get the message. Our hope is that by then it won't be too late.
Maybe then the 133 Republicans, including Utah's Rob Bishop, and 95 Democrats, including Utah's Jim Matheson, who voted against the bailout will realize that they've got to stand up and vote for a plan to restore faith in the nation's credit markets. They've got to do so even if it costs them an election. They've got to do it to keep faith with the best interests of their constituents, even if those same voters don't understand that.
That's leadership. That's statesmanship. And here's the irony. That's what's been missing from the presidency and Congress, and why we're in this fix in the first place.
The members of Congress, who don't trust the president, the secretary of the Treasury and the chairman of the Federal Reserve, and who are worried that a vote for the bailout would be political suicide a month before an election, voted the bailout down 228-205 Monday.
But make no mistake. If Congress is unwilling to pass a bailout that might restore faith in the financial markets, it will plunge the United States deeper into the abyss of the unknown.
So, yes, a $700 billion bailout would be a leap of faith. No one can guarantee that it will work. No one can honestly promise that it will free up credit or that the Treasury will get all of the public's money back if it buys up distressed securities and holds them for a couple of years while financial experts try to figure out what they are worth. Nothing is certain.
But doing nothing looks worse. Already, three Wall Street investment banks have failed, and two others will become commercial banks. The U.S. government has nationalized Fannie and Freddie. Washington Mutual has become the largest bank failure inU.S. history, and Wachovia almost followed Monday. What more evidence do the American people need?
Need it or not, they are going to get it. After the House vote Monday, the Dow plunged 780 points, the largest single-day loss in history and a 7 percent decline. The Nasdaq and S&P 500 did even worse, each losing about 9 percent.
If this kind of bloodletting continues, and more huge banks collapse, maybe the House will get the message. Our hope is that by then it won't be too late.
Maybe then the 133 Republicans, including Utah's Rob Bishop, and 95 Democrats, including Utah's Jim Matheson, who voted against the bailout will realize that they've got to stand up and vote for a plan to restore faith in the nation's credit markets. They've got to do so even if it costs them an election. They've got to do it to keep faith with the best interests of their constituents, even if those same voters don't understand that.
That's leadership. That's statesmanship. And here's the irony. That's what's been missing from the presidency and Congress, and why we're in this fix in the first place.
Thursday, 25 September 2008
Shares of most large banks and finance firms slumped as the Senate Banking Committee's hearing on the $700 billion Wall Street bailout came to an end
Shares of most large banks and finance firms slumped as the Senate Banking Committee's hearing on the $700 billion Wall Street bailout came to an end without alleviating investor concerns.Dismayed investors are still throwing a "hissy fit" that the deal wasn't completed when they came into work Monday morning, said Matt McCormick, portfolio manager with Bahl & Gaynor Investment Counsel, a money management firm. "Wall Street clearly wants a deal done yesterday, regardless of what's actually in the deal," said McCormick. "They don't really care about what's in the details. They don't care about discussing the long-term effects on the economy. They just want it done." McCormick added, "As the deal changes hourly, nobody knows what the rules are."The S&P Banking Index was down 2% in late afternoon trading, led by losses in regional banks Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500) and battered savings and loan Washington Mutual (WM, Fortune 500).
Shares of top banks JPMorgan Chase (JPM, Fortune 500), ,Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and investment bank Goldman Sachs (GS, Fortune 500) also were trading lower. But Goldman rival Morgan Stanley (MS, Fortune 500) bucked the downward trend and was up 2%. The gains came one day after Morgan Stanley agreed to sell up to one-fifth of its company to Mitsubishi UFJ Financial Group, one of Japan's largest banks.Brad Hintz, analyst for Sanford C. Bernstein, said that most bank stocks were down due to a combination of fears about further disruption in the credit markets as well as worries that the government may not approve a bank bailout.Politicians grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke about the bailout Tuesday.
Paulson said the bailout is necessary for "the very health of the economy." He said it should be big enough to have "maximum impact and restore market confidence" and it should also have transparency and oversight.
Bernanke also spoke in favor of the bailout: "We believe that strong and timely action is urgently needed to stabilize our economy."
Proponents of the bailout believe that it is necessary in order to save the economy. But others believe it is too expensive and baseless.
Oppenheimer analyst Meredith Whitney, one of the most influential banking analysts on Wall Street, said in a report published Tuesday that the bailout was too late to save the credit and lending markets."A virtual suction of liquidity has occurred in the credit and lending markets, and consumer and corporate credit is already showing the effects," Whitney said. "What started last summer has accelerated and intensified so much so that we believe any government bailout plan has little hope of improving core fundamentals over the near and medium term," she added.
Shares of top banks JPMorgan Chase (JPM, Fortune 500), ,Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and investment bank Goldman Sachs (GS, Fortune 500) also were trading lower. But Goldman rival Morgan Stanley (MS, Fortune 500) bucked the downward trend and was up 2%. The gains came one day after Morgan Stanley agreed to sell up to one-fifth of its company to Mitsubishi UFJ Financial Group, one of Japan's largest banks.Brad Hintz, analyst for Sanford C. Bernstein, said that most bank stocks were down due to a combination of fears about further disruption in the credit markets as well as worries that the government may not approve a bank bailout.Politicians grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke about the bailout Tuesday.
Paulson said the bailout is necessary for "the very health of the economy." He said it should be big enough to have "maximum impact and restore market confidence" and it should also have transparency and oversight.
Bernanke also spoke in favor of the bailout: "We believe that strong and timely action is urgently needed to stabilize our economy."
Proponents of the bailout believe that it is necessary in order to save the economy. But others believe it is too expensive and baseless.
Oppenheimer analyst Meredith Whitney, one of the most influential banking analysts on Wall Street, said in a report published Tuesday that the bailout was too late to save the credit and lending markets."A virtual suction of liquidity has occurred in the credit and lending markets, and consumer and corporate credit is already showing the effects," Whitney said. "What started last summer has accelerated and intensified so much so that we believe any government bailout plan has little hope of improving core fundamentals over the near and medium term," she added.
John Paulson’s hedge fund emerged Tuesday as the biggest short seller of British banks,
John Paulson’s hedge fund emerged Tuesday as the biggest short seller of British banks, The Financial Times reported, citing filings made under a new regulatory regime.Mr. Paulson, whose historic bet against the housing market that earned him more than $3 billion last year, has shorted four of the U.K.’s five biggest banks, the newspaper said, citing the filings.Mr Paulson, the founder of Paulson & Company, has bet against four of the five biggest British banks, according to filings made under a new regulatory regime on Tuesday. Among his positions are a 350 million pound bet against shares in Barclays; a 292 million pound bet against Royal Bank of Scotland; and 260 million pound bet against Lloyds TSB, according to the newspaper.
The newspaper noted that Mr. Paulson, anticipating criticism for his moves, defended the short positions, saying his hedge fund “empathizes with financial firms as to the difficult positions in which many find themselves.”Last week, British and U.S. regulators moved to temporarily ban short sales on a slew of financial firms. The regulators also enacted new disclosure rules for institutional short-sellers
Short selling — a bet that a stock price will decline — is the practice of selling stock without owning it, hoping to buy it later at a lower price, and thus make a profit. It has often been blamed for forcing prices down in times of market stress, but the level of anger has intensified as the American government has been forced to bail out major financial institutions and the leaders of some investment banks have asked for action to protect their shares.
The newspaper noted that Mr. Paulson, anticipating criticism for his moves, defended the short positions, saying his hedge fund “empathizes with financial firms as to the difficult positions in which many find themselves.”Last week, British and U.S. regulators moved to temporarily ban short sales on a slew of financial firms. The regulators also enacted new disclosure rules for institutional short-sellers
Short selling — a bet that a stock price will decline — is the practice of selling stock without owning it, hoping to buy it later at a lower price, and thus make a profit. It has often been blamed for forcing prices down in times of market stress, but the level of anger has intensified as the American government has been forced to bail out major financial institutions and the leaders of some investment banks have asked for action to protect their shares.
U.S. Congress is currently reviewing a $700 billion plan
Half the battle with this financial crisis is finding a way to address distress / bad mortgage assets / bonds. The U.S. Congress is currently reviewing a $700 billion plan to address the above, although the plan could differ considerably from the U.S. Treasury's proposal. The other part of the battle is maintaining liquidity for day-to-day operations in finance and the "real economy." Swap lines will help achieve this goal. The swaps are the (roughly) corporate equivalent of 'keeping ATMs stocked with plenty of cash' for commercial customers.
ICICI will have to take a loss of $28 million and make provisions for this. Tata AIG, by far the most affected Indian company
ICICI will have to take a loss of $28 million and make provisions for this. Tata AIG, by far the most affected Indian company, will have to do some serious firefighting. Happily, though, finance minister P Chidambaram has assured the insurers that the firm will have all the necessary funds to absorb these losses. For the rest, there need not be any fear. The global credit crisis will only have a marginal impact on the Indian economy as our financial institutions are insulated and regulators have been losing their jobs. However, one casualty will be India's contemplated introduction of long-term capital convertibility which will now be delayed.
Washington Mutual, one of the nation’s biggest and most troubled financial institutions, remains locked in a dance with several suitor
Washington Mutual, one of the nation’s biggest and most troubled financial institutions, remains locked in a dance with several suitors, all hesitant about a union until they can understand more clearly just how the government’s plan to siphon soured assets out of banks like WaMu will work.
vulture investors are combing through balance sheets of possible targets that could run into trouble if banks start calling back loans to businesses and the economy worsens.In the beaten-down banking industry, private equity investors are scrambling to find investment opportunities in downtrodden community and regional banks that can be nursed back to profitability in a turnaround.In the coming weeks and months, these investors are betting the opportunities will become clearer. They are preparing for a field day for deals, not only in the financial industry, but in the industrial, retail and other sectors where the flagging economy and tight credit will push more companies to the brink.In a sign that the climate of fear that had frozen some big deals may be thawing, Warren E. Buffett announced plans Tuesday to invest $5 billion in Goldman Sachs. Analysts also questioned whether Morgan Stanley, the venerable investment bank, could still become a takeover target even after it secured a huge investment on Tuesday by Mitsibushi UFJ Financial Group.
“There is a growing crowd of hedge funds and private equity firms and stronger banks that are shopping. They are all going to bid against each other,” Christopher Whalen, a managing partner at Institutional Risk Analytics, told The Times. “A lot of my clients see financials in 2009 and 2010 as being a huge home run,” he added.
To be sure, it is still unclear how firms that buckled under the weight of toxic mortgage assets will be treated under the plan of Treasury Secretary Henry M. Paulson Jr. to stabilize the housing market — the root of the crisis that has left a litter of banks and companies scattered across the economic landscape for vulture buyers to pick through.Indeed, Mr. Paulson and Ben S. Bernanke, chairman of the Federal Reserve, spent much of the day in tense testimony before skeptical members of the Senate Banking Committee. The outlines of the emergency plan appeared uncertain after lawmakers raised concerns about its size and scope, driving the stock market sharply down for a second day.As long as that continues, the fate of several big banks whose fortunes may yet be altered by the final contours of the rescue package remain in flux.
The banks bidding for Washington Mutual — like JPMorgan Chase, Citigroup, Banco Santander and Wells Fargo — are trying to calculate how much they should pay for a company whose losses may eventually reach $30 billion. The sum may also depend on how many tainted assets Washington Mutual might dump into a government bailout fund, and what price the government or private parties might pay for those assets.
Also unclear is whether the scope of assets to be salvaged by the government will include commercial real estate and credit card loans, on top of troubled home loans and mortgage-related securities.
Washington Mutual faces several pressure points that suggest a deal will need to be carried out soon if the bank — considered one of Wall Street’s weakest links after the failure of Lehman Brothers last week — is to avoid outright collapse. Such a move could cost taxpayers billions more because it would virtually wipe out the federal deposit insurance fund.
The bank, which grew into a behemoth over the last decade through a series of acquisitions that proved its undoing, has seen its name in headlines alongside other troubled giants of the financial world, including Lehman Brothers and American International Group. To attract customer deposits, Washington Mutual has been offering 5 percent for one-year certificates of deposit — exceeding the 4 percent that other weakened banks are offering.
Despite WaMu’s problems, its suitors are eager to gain access to a lucrative consumer base that it has built throughout the country. JPMorgan wants to gain a foothold in California, where Washington Mutual has plenty of branches, a move that would further entrench it in key markets like Chicago and New York.
Citigroup is interested in access to a deposit-gathering franchise in several big markets, which would raise its overall number of branches. Banco Santander would expand its presence in the United States. Wells Fargo, already a big player in California, would prevent JPMorgan and other potential rivals from encroaching on its territory.
Under its former chief executive Kerry Killinger, the Washington Mutual dove into a particularly risky part of the mortgage business, making option adjustable rate mortgage arm loans to the least creditworthy borrowers, who were permitted to pay only a portion of the principle and interest.
While the new chief executive, Alan Fishman, had more of Wall Street’s confidence, it has become too late to resolve the ailing bank’s problems, analysts said.
Some analysts had even asked whether TPG, formerly Texas Pacific Group, which together with other investors had put $7 billion into WaMu, might add more capital. But that generally seemed unlikely. The group had invested roughly $8.75 a share and was well under water on that investment while the government announced a major overhaul that might take the troubled loans off Washington Mutual’s balance sheet.
Nevertheless, shareholders have a stake in a company that has great appeal to other banks because of its wide depositor base which could provide stable capital to another buyer.
vulture investors are combing through balance sheets of possible targets that could run into trouble if banks start calling back loans to businesses and the economy worsens.In the beaten-down banking industry, private equity investors are scrambling to find investment opportunities in downtrodden community and regional banks that can be nursed back to profitability in a turnaround.In the coming weeks and months, these investors are betting the opportunities will become clearer. They are preparing for a field day for deals, not only in the financial industry, but in the industrial, retail and other sectors where the flagging economy and tight credit will push more companies to the brink.In a sign that the climate of fear that had frozen some big deals may be thawing, Warren E. Buffett announced plans Tuesday to invest $5 billion in Goldman Sachs. Analysts also questioned whether Morgan Stanley, the venerable investment bank, could still become a takeover target even after it secured a huge investment on Tuesday by Mitsibushi UFJ Financial Group.
“There is a growing crowd of hedge funds and private equity firms and stronger banks that are shopping. They are all going to bid against each other,” Christopher Whalen, a managing partner at Institutional Risk Analytics, told The Times. “A lot of my clients see financials in 2009 and 2010 as being a huge home run,” he added.
To be sure, it is still unclear how firms that buckled under the weight of toxic mortgage assets will be treated under the plan of Treasury Secretary Henry M. Paulson Jr. to stabilize the housing market — the root of the crisis that has left a litter of banks and companies scattered across the economic landscape for vulture buyers to pick through.Indeed, Mr. Paulson and Ben S. Bernanke, chairman of the Federal Reserve, spent much of the day in tense testimony before skeptical members of the Senate Banking Committee. The outlines of the emergency plan appeared uncertain after lawmakers raised concerns about its size and scope, driving the stock market sharply down for a second day.As long as that continues, the fate of several big banks whose fortunes may yet be altered by the final contours of the rescue package remain in flux.
The banks bidding for Washington Mutual — like JPMorgan Chase, Citigroup, Banco Santander and Wells Fargo — are trying to calculate how much they should pay for a company whose losses may eventually reach $30 billion. The sum may also depend on how many tainted assets Washington Mutual might dump into a government bailout fund, and what price the government or private parties might pay for those assets.
Also unclear is whether the scope of assets to be salvaged by the government will include commercial real estate and credit card loans, on top of troubled home loans and mortgage-related securities.
Washington Mutual faces several pressure points that suggest a deal will need to be carried out soon if the bank — considered one of Wall Street’s weakest links after the failure of Lehman Brothers last week — is to avoid outright collapse. Such a move could cost taxpayers billions more because it would virtually wipe out the federal deposit insurance fund.
The bank, which grew into a behemoth over the last decade through a series of acquisitions that proved its undoing, has seen its name in headlines alongside other troubled giants of the financial world, including Lehman Brothers and American International Group. To attract customer deposits, Washington Mutual has been offering 5 percent for one-year certificates of deposit — exceeding the 4 percent that other weakened banks are offering.
Despite WaMu’s problems, its suitors are eager to gain access to a lucrative consumer base that it has built throughout the country. JPMorgan wants to gain a foothold in California, where Washington Mutual has plenty of branches, a move that would further entrench it in key markets like Chicago and New York.
Citigroup is interested in access to a deposit-gathering franchise in several big markets, which would raise its overall number of branches. Banco Santander would expand its presence in the United States. Wells Fargo, already a big player in California, would prevent JPMorgan and other potential rivals from encroaching on its territory.
Under its former chief executive Kerry Killinger, the Washington Mutual dove into a particularly risky part of the mortgage business, making option adjustable rate mortgage arm loans to the least creditworthy borrowers, who were permitted to pay only a portion of the principle and interest.
While the new chief executive, Alan Fishman, had more of Wall Street’s confidence, it has become too late to resolve the ailing bank’s problems, analysts said.
Some analysts had even asked whether TPG, formerly Texas Pacific Group, which together with other investors had put $7 billion into WaMu, might add more capital. But that generally seemed unlikely. The group had invested roughly $8.75 a share and was well under water on that investment while the government announced a major overhaul that might take the troubled loans off Washington Mutual’s balance sheet.
Nevertheless, shareholders have a stake in a company that has great appeal to other banks because of its wide depositor base which could provide stable capital to another buyer.
Thousands of Hong Kong savers mobbed branches of Bank of East Asia
Thousands of Hong Kong savers mobbed branches of Bank of East Asia on Wednesday to withdraw deposits, as the bank scrambled to reassure them it was not overexposed to Lehman Brothers and AIG.Police were called in to control the crowds after text messages flashed across the city warning the bank was unstable as it held a large number of assets linked to the failed Wall Street bank and the troubled insurance giant.But BEA and the city's financial authorities moved quickly to rebuff the claims, insisting the bank was in a solid financial position."It has come to the notice of The Bank of East Asia (BEA)... that malicious rumours have been circulated questioning the stability of the bank," the bank said in a statement."The management of BEA hereby states in the strongest possible terms that such rumours have no basis in fact. The management further confirms that the bank's financial position is sound and stable."Hundreds gathered outside branches across the city and the bank extended opening hours for several hours to try and deal with the rush of customers.
"I hope it is just panic, but you never know. I am going to take my money out and put it in another bank," said public relations worker Ada Ho, outside a city centre branch. Ho said she read the rumours on the Internet.At one branch they issued IOUs and told people to come back in the morning to claim their deposits, an AFP photographer said.Up to 400 disgruntled savers, many of them elderly, had to be held back by police as they battled to get inside one branch of BEA in southern Hong Kong island before it closed, according to an AFP photographer at the scene.The bank's deputy chief executive, Joseph Pang, told Dow Jones Newswires that while there have been slightly more bank withdrawals than usual, the situation was "manageable."Pang said the bank first learned of the rumour on Monday, but didn't disclose it immediately because it wanted to avoid spreading panic.The statement said BEA's outstanding exposure was 422.8 million Hong Kong dollars (54.2 million US) to Lehman's and 49.9 million dollars to AIG.Its total consolidated assets stood at 396.6 billion Hong Kong dollars on June 30, with a capital adequacy ratio of 14.6 percent, well above the international required level, the statement added.
The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, insisted the banking system was "safe and sound.""Local banks are well capitalised and highly liquid... The rumours of the financial instability of BEA are unfounded," it said in a statement.Joseph Yam, HKMA's chief executive, said it would provide liquidity if BEA required it, but no request had been made. He said the police would investigate who started the rumour.Shares in the bank dropped as much as 11.3 percent in afternoon trade on the Hong Kong Stock Exchange after falling 6.9 percent over the past two trading days.However, after the bank's statement its shares rallied in late trade to close down 6.9 percent on the day.The drama came just days after the company was forced to restate its earnings downwards by almost 12 percent, after it found that one of its workers had buried losses from an unauthorised trade.
The bank wrote-down its profits after it found the 93 million Hong Kong dollar trading loss, which it attributed to "an unauthorised manipulation of the valuation of certain equity derivatives held by the bank," the Financial Times reported.
The bank's chairman is Hong Kong tycoon David Li, a member of one of Hong Kong's most powerful families, which has been prominent for five generations in business and politics.His grandfather founded the Bank of East Asia in 1918 and the lender boasts one of the biggest branch networks in mainland China among Hong Kong lenders.
Hong Kong investors reluctance to heed government assurances may be linked to the collapse of Bank of Credit and Commerce International in the early 1990s.
The government issued a statement at the time saying that the Hong Kong arm of the bank was "sound and viable" and encouraged investors to stop withdrawing cash.But just days later they were forced to liquidate the bank, leaving many savers in the lurch.
"I hope it is just panic, but you never know. I am going to take my money out and put it in another bank," said public relations worker Ada Ho, outside a city centre branch. Ho said she read the rumours on the Internet.At one branch they issued IOUs and told people to come back in the morning to claim their deposits, an AFP photographer said.Up to 400 disgruntled savers, many of them elderly, had to be held back by police as they battled to get inside one branch of BEA in southern Hong Kong island before it closed, according to an AFP photographer at the scene.The bank's deputy chief executive, Joseph Pang, told Dow Jones Newswires that while there have been slightly more bank withdrawals than usual, the situation was "manageable."Pang said the bank first learned of the rumour on Monday, but didn't disclose it immediately because it wanted to avoid spreading panic.The statement said BEA's outstanding exposure was 422.8 million Hong Kong dollars (54.2 million US) to Lehman's and 49.9 million dollars to AIG.Its total consolidated assets stood at 396.6 billion Hong Kong dollars on June 30, with a capital adequacy ratio of 14.6 percent, well above the international required level, the statement added.
The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, insisted the banking system was "safe and sound.""Local banks are well capitalised and highly liquid... The rumours of the financial instability of BEA are unfounded," it said in a statement.Joseph Yam, HKMA's chief executive, said it would provide liquidity if BEA required it, but no request had been made. He said the police would investigate who started the rumour.Shares in the bank dropped as much as 11.3 percent in afternoon trade on the Hong Kong Stock Exchange after falling 6.9 percent over the past two trading days.However, after the bank's statement its shares rallied in late trade to close down 6.9 percent on the day.The drama came just days after the company was forced to restate its earnings downwards by almost 12 percent, after it found that one of its workers had buried losses from an unauthorised trade.
The bank wrote-down its profits after it found the 93 million Hong Kong dollar trading loss, which it attributed to "an unauthorised manipulation of the valuation of certain equity derivatives held by the bank," the Financial Times reported.
The bank's chairman is Hong Kong tycoon David Li, a member of one of Hong Kong's most powerful families, which has been prominent for five generations in business and politics.His grandfather founded the Bank of East Asia in 1918 and the lender boasts one of the biggest branch networks in mainland China among Hong Kong lenders.
Hong Kong investors reluctance to heed government assurances may be linked to the collapse of Bank of Credit and Commerce International in the early 1990s.
The government issued a statement at the time saying that the Hong Kong arm of the bank was "sound and viable" and encouraged investors to stop withdrawing cash.But just days later they were forced to liquidate the bank, leaving many savers in the lurch.
Tuesday, 23 September 2008
Morgan Stanley and Goldman Sachs Group Inc. led a drop in the cost of protecting bank bonds from default as the U.S. government broadened the scope of
Morgan Stanley and Goldman Sachs Group Inc. led a drop in the cost of protecting bank bonds from default as the U.S. government broadened the scope of its plan to stem the financial crisis. Credit-default swaps on the securities firms fell to the lowest in a week after the Federal Reserve approved their bids to become banks and Mitsubishi UFJ Financial Group Inc. said it may buy as much as a fifth of Morgan Stanley. Contracts on banks including Wachovia Corp. and Bank of America Corp. also fell as U.S. Treasury Secretary Henry Paulson submitted a plan to Congress to buy $700 billion of devalued assets. The scope of the government's purchase program is quite significant,'' Merrill Lynch & Co. strategists Akiva Dickstein, Roger Lehman and Kamal Abdullah wrote in a note to clients today. At distressed prices, the Treasury could acquire as much as 10 percent of the outstanding residential and commercial mortgages that aren't already owned or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, they said. Treasury's plan and the approval of Morgan Stanley and Goldman as bank holding companies boosted investor confidence that the government has calmed the financial turmoil that last week drove Lehman Brothers Holdings Inc. into bankruptcy, while prompting the government to bail out insurer American International Group Inc. and Merrill Lynch & Co. to sell itself to Bank of America Corp. Cars, Credit Cards The U.S. Treasury late yesterday gave Congress revised guidance on its plan, which may allow the government to also buy other devalued assets such as car loans and credit-card debt. Paulson also has proposed as much as $400 billion to guarantee money-market mutual funds. Contracts on Morgan Stanley dropped 132 basis points to 415 basis points, according to CMA Datavision in London. Mitsubishi UFJ, Japan's biggest bank by assets, agreed to invest up to 900 billion yen ($8.4 billion) in Morgan Stanley, the bank said in a statement today. Contracts on Goldman fell 87 basis points to 280 basis points. Converting Morgan Stanley and Goldman into banks ``seems to be a sensible solution for them,'' said Andrea Cicione, a credit strategist at BNP Paribas SA in London. ``The broker business model seems broken. Turning them into commercial banks helps take care of the funding problem. It takes some pressure off them to go into a quickly decided wedding with some other banks.'' The Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk tied to the bonds of 125 companies in the U.S. and Canada, was unchanged at 151 basis points, according to broker Phoenix Partners Group. Wachovia, Merrill Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals improvement. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Banking dead were rising from their graves and financial stock zombies were seen stumbling through the trading day
Banking dead were rising from their graves and financial stock zombies were seen stumbling through the trading day with the disjointed, uncertain gait of trauma victims being forced to take a long march when they would rather take a nice ride on a gurney.It all began a day before when in reaction to the prospect of nothing less than a total collapse of the world's financial system (triggered by the imminent implosion of teetering AIG, ( http://www.nytimes.com/)) the brightest minds in the nation pulled together and, in an inspiring bipartisan show, boldly ordered increased supplies of chewing gum, Bondo, and duct tape. The SEC, in their escalating and poignantly quixotic battle with the laws of Gravity, Logic, and Physics, released a vastly expanded version of July's "No Crappy Bank Left Behind Act" (NCBLB). In a historic move, Chairman Christopher Cox issued a papal ban on short selling, an edict which ranks alongside Pope Gregory's defense of a flat earth. 799 financial stocks in various stages of health ranging from organ donor to the sniffles were swooped beyond the reach of short sellers: naked, casual, or formally dressed. The crisis was postponed until the week of October 2nd, and markets around the world rejoiced. With this 11th hour pardon from the governor, a legion of bionically enhanced pigs, destined to become bacon bits the day before, was now unleashed on the market. Within hours, birdwatchers and air traffic controllers reported sightings of enormous flying porkers all along the eastern seaboard. WB, WM, FNM, FRE, MER, BAC were lifted into the stratosphere on a fast moving current of hot air issuing directly from Washington D.C. Not everyone was on board. Cynics stated that this move by the SEC signals a desperate SOS (“Save Our Stocks”) and that the rescue could cost a not insignificant $1 Trillion (USD) ( http://www.independent.co.uk/..). The budget minded were similarly spooked when the Treasury announced the special sale of a brain-busting $174 billion in treasuries, to be completed within the week (http://online.wsj.com/article/..) and inflation-sensitive investors, aka ‘crazy gold bugs', continued to snap up the yellow metal, bought MREs, and investigated underground bunkers in Canada beyond the inevitable taxation which will be needed to pay for this. We on Trader's Asylum, however, preferred to maintain a more positive and open mind considering the profits we made the last time the SEC battled the laws of physics. On it's Friday debut, however, NCBLB II (Return of the Dung) , seemed less well received than its predecessor. Like every sequel, we probably know how this one is going to end, having seen the first one. Oh it's true, shorters covered pre-market and financial stocks were up between 50-100%, but at the opening bell, investors and shorters alike took their windfall profits and immediately fled the scene of the crime. Trading seemed disconcertingly lackluster to those who expected a massive short covering rally and treasury mandated fireworks. Could be that despite the cheerleading and hosannas on the media, doubts about the patient's prognosis remained? It seemed buyers ventured back with all the enthusiasm of someone being forced to dance with a pair of six guns pointed at his feet. The situation improved somewhat into the close, but stocks failed to revisit their opening highs. The sense we had, watching the level 2s for our watch list: XLF, SKF, AIG, FNM, FRE, UYG, was that Market appeared frozen, and some speculated perhaps some of the gum intended to patch the gash in the hull of the distressed S.S. Wall Street had fallen into the gears of the market instead.
Harvey, my trading partner, bored with hanging up on cold callers trying to sell him distressed banking divisions, decided to join the party with an array of AIG calls, figuring that AIG was the guest of honor for whom this particular charade had been thrown anyway (much as the Humidorian Reaction of mid-July was thrown for the benefit of Fannie and Freddie and their urgent need to raise capital). However, although AIL JU (AIG $7.50 October calls) made a lovely little run from a low of .13c to .52 at the close, there was hardly the same joie de vivre and verve seen in July after the first round of shorting restrictions.
I guess I can't blame Mr. Market for being a less than enthusiastic participant in the bold new plan. After all, he's being treated to the delightful prospect of a luge ride without brakes (and, considering the state of AIG, MBI, and ABK, probably without insurance as well). It's important also to note that this past week's demise of LEH, near death experience of MER, and mauling of MS and GS may have eliminated or subdued the very market makers who made the market liquid in the first place. However, it's nothing a little WD-40 won't fix; and fresh supplies are already on their way. Entirely left out of Friday's brave new rally was monoline insurer and multi-car collision victim Ambac (ABK), whose shares plummeted 41% ( http://www.forbes.com/f..) to a low of $3.87, presumably without the assistance of any shorters. This swan dive no doubt left message board faithful stunned and proved that gravity was still able to extend its awesome reach even into the would-be sanctuary created by the SEC. We wondered if ABK's unpatriotic dip into the red might inspire an even more drastic response. “What's next,” Harvey asked, "a ban on selling altogether? Is the color red to be outlawed during October, leap years and months which end with “r”? Why not just replace today's dismal screens with re-runs from 1985, 1996, and 1999, happier market feeds from years when Dow 10,000 was a ‘good thing', just as TV stations re-run old programming during technical difficulties.” Perhaps, I offered, "Don't Worry, Be Happy" could run on a loop when retail investors log into their Ameritrade or E-trade accounts, and “Happy Days are Here Again” required for all commercial brokerage on-hold music. The SEC, with one bold stroke, has eliminated shorters, but has also prevented hedging in the options market, thus clogging an important risk transfer mechanism used by major institutions ( http://globaleconomicanalysis.blogspot.com/..). But never mind, voters who have never even considered shorting let alone buying an option a day in their lives are comforted and elated. The wicked witch is safely tucked under a house, and the problem is solved. Never mind that short selling, a strategy introduced in 1600s Holland, managed to survive the French Revolution, 2 World Wars, and the Great Depression, has proven necessary for 400 years. Never mind that the air pockets created by its elimination will only magnify a later plunge ( http://globaleconomicanalysis.blogspot.com/..). All that matters is that the collapse has been postponed, preferably until after the circus of the election has left town. Until October 2nd, shorting has gone from being a tool available to ordinary investors, to a crime as heinous as jaywalking, egging a church or attempting to poison one's mother in law. I'm told that those who even consider the left-hand path of going short or daring to mention the vulnerable naked state of the Emperor and his top U.S. investment banks could end up on a watch list of subversives with an agenda to make a profit. Last week's crisis will henceforth be known as "the recent unpleasantness" or the "war of shorter aggression." By divine decree, all banks are now well-loved, well capitalized, and above average. Saying or writing otherwise might get you labeled as a dangerous Financial Terrorist. ( http://www.cnbc.com/..) I can only presume we will soon receive alerts to seal up our trading stations with plastic wrap and duct tape. Upon hearing Thursday's news, Harvey briefly considered giving up trading and going back to mucking out stables, where at least one knows one is dealing with horse manure and can dress appropriately. He's decided, however, that perhaps the situation can be mined for the high comedy value instead, and suggested a season of Survivor based in the canyons of Wall Street, a show where former CEOs and Managing Directors are forced to eat worms in order to avoid having to pay back last year's bonuses.
But in closing, at the risk of seeing depressingly dull and pedestrian, I must wonder why, instead of draconian new measures, the SEC does not simply restore the “uptick rule” ( http://en.wikipedia.org/wiki/Uptick_rule ), instituted in the 1930's after the last time the bad boys of Wall Street managed to wreck the playroom? But alas, perhaps that is too simple and elegant a solution, and painfully bland and obvious no matter how effective. It's like avoiding the use of arithmetic to determine whether a buyer is qualified to buy a house, instead relying on convoluted models and expensive metrics. So, like it or not, they'll bring on the complex, the fallacious, the the muti-chef chewing gum solutions, and I'll go back to buying gold, which kept climbing on Friday as a large sector of investors remained unconvinced by Project SOB (“Save Our Banks"). But you gotta feel sorry for Ben Bernanke, inheritor of a ticking time bomb and now faced with the unenviable job of having to choose between permitting an immediate and total financial breakdown and advocating solutions which will lead to higher taxes, diminished lifestyle, and a prolonged recession with no guarantee of a cure. With this in mind, savvy traders should keep those steel umbrellas near at hand to protect themselves from the scat from all those flying pigs.
Harvey, my trading partner, bored with hanging up on cold callers trying to sell him distressed banking divisions, decided to join the party with an array of AIG calls, figuring that AIG was the guest of honor for whom this particular charade had been thrown anyway (much as the Humidorian Reaction of mid-July was thrown for the benefit of Fannie and Freddie and their urgent need to raise capital). However, although AIL JU (AIG $7.50 October calls) made a lovely little run from a low of .13c to .52 at the close, there was hardly the same joie de vivre and verve seen in July after the first round of shorting restrictions.
I guess I can't blame Mr. Market for being a less than enthusiastic participant in the bold new plan. After all, he's being treated to the delightful prospect of a luge ride without brakes (and, considering the state of AIG, MBI, and ABK, probably without insurance as well). It's important also to note that this past week's demise of LEH, near death experience of MER, and mauling of MS and GS may have eliminated or subdued the very market makers who made the market liquid in the first place. However, it's nothing a little WD-40 won't fix; and fresh supplies are already on their way. Entirely left out of Friday's brave new rally was monoline insurer and multi-car collision victim Ambac (ABK), whose shares plummeted 41% ( http://www.forbes.com/f..) to a low of $3.87, presumably without the assistance of any shorters. This swan dive no doubt left message board faithful stunned and proved that gravity was still able to extend its awesome reach even into the would-be sanctuary created by the SEC. We wondered if ABK's unpatriotic dip into the red might inspire an even more drastic response. “What's next,” Harvey asked, "a ban on selling altogether? Is the color red to be outlawed during October, leap years and months which end with “r”? Why not just replace today's dismal screens with re-runs from 1985, 1996, and 1999, happier market feeds from years when Dow 10,000 was a ‘good thing', just as TV stations re-run old programming during technical difficulties.” Perhaps, I offered, "Don't Worry, Be Happy" could run on a loop when retail investors log into their Ameritrade or E-trade accounts, and “Happy Days are Here Again” required for all commercial brokerage on-hold music. The SEC, with one bold stroke, has eliminated shorters, but has also prevented hedging in the options market, thus clogging an important risk transfer mechanism used by major institutions ( http://globaleconomicanalysis.blogspot.com/..). But never mind, voters who have never even considered shorting let alone buying an option a day in their lives are comforted and elated. The wicked witch is safely tucked under a house, and the problem is solved. Never mind that short selling, a strategy introduced in 1600s Holland, managed to survive the French Revolution, 2 World Wars, and the Great Depression, has proven necessary for 400 years. Never mind that the air pockets created by its elimination will only magnify a later plunge ( http://globaleconomicanalysis.blogspot.com/..). All that matters is that the collapse has been postponed, preferably until after the circus of the election has left town. Until October 2nd, shorting has gone from being a tool available to ordinary investors, to a crime as heinous as jaywalking, egging a church or attempting to poison one's mother in law. I'm told that those who even consider the left-hand path of going short or daring to mention the vulnerable naked state of the Emperor and his top U.S. investment banks could end up on a watch list of subversives with an agenda to make a profit. Last week's crisis will henceforth be known as "the recent unpleasantness" or the "war of shorter aggression." By divine decree, all banks are now well-loved, well capitalized, and above average. Saying or writing otherwise might get you labeled as a dangerous Financial Terrorist. ( http://www.cnbc.com/..) I can only presume we will soon receive alerts to seal up our trading stations with plastic wrap and duct tape. Upon hearing Thursday's news, Harvey briefly considered giving up trading and going back to mucking out stables, where at least one knows one is dealing with horse manure and can dress appropriately. He's decided, however, that perhaps the situation can be mined for the high comedy value instead, and suggested a season of Survivor based in the canyons of Wall Street, a show where former CEOs and Managing Directors are forced to eat worms in order to avoid having to pay back last year's bonuses.
But in closing, at the risk of seeing depressingly dull and pedestrian, I must wonder why, instead of draconian new measures, the SEC does not simply restore the “uptick rule” ( http://en.wikipedia.org/wiki/Uptick_rule ), instituted in the 1930's after the last time the bad boys of Wall Street managed to wreck the playroom? But alas, perhaps that is too simple and elegant a solution, and painfully bland and obvious no matter how effective. It's like avoiding the use of arithmetic to determine whether a buyer is qualified to buy a house, instead relying on convoluted models and expensive metrics. So, like it or not, they'll bring on the complex, the fallacious, the the muti-chef chewing gum solutions, and I'll go back to buying gold, which kept climbing on Friday as a large sector of investors remained unconvinced by Project SOB (“Save Our Banks"). But you gotta feel sorry for Ben Bernanke, inheritor of a ticking time bomb and now faced with the unenviable job of having to choose between permitting an immediate and total financial breakdown and advocating solutions which will lead to higher taxes, diminished lifestyle, and a prolonged recession with no guarantee of a cure. With this in mind, savvy traders should keep those steel umbrellas near at hand to protect themselves from the scat from all those flying pigs.
U.S. banking bailout moves ahead, WaMu, sickest of the U.S. regional banks
U.S. banking bailout moves ahead, there's a backlash building on two fronts: executive compensation and participation of foreign financial institutions.That second point threatens to derail any bid for troubled Washington Mutual by Toronto-Dominion Bank.There's broad agreement in Washington that the U.S. taxpayer's $700-billion purchase of troubled loans is necessary to the survival of the American banking systems. If finessed just right, there's an opportunity for U.S. taxpayers to take actually make a few bucks on this trade.However, politicians and the general public are going to struggle with any rescue package that enriches the folks who caused this crisis, or perceived outsiders.That's why you're now hearing populist calls to cap executive compensation at any financial institution that taps the bailout fund. Those calls are going to intensify as U.S. elections play out.
Then there's foreign participation in the bailout fund. The citizens of Buffalo already miffed about losing their football team to Toronto once a season. Now they're going to subsidize Toronto's banks, too? You can just see New York Senator Chuck Schumer, who runs the key finance committee, going ballistic on this one.
Which brings us to WaMu, sickest of the U.S. regional banks, and arguably the most attractive target. Seattle-based WaMu has a huge branch network and an equally huge portfolio of mortgages and loans - $309-billion, with a substantial amount of these assets impaired.WaMu formally went on the auction block last week. While the bank's board insists they have enough liquidity to keep rolling in the short-term, it's clear that in the not too distant future, WaMu is going to be tapping the bailout fund, big time. Back-of-an envelope estimates by one fund manager have WaMu needing to sell $40-billion of bad mortgages. TD Bank is reported to be kicking tires at this bank along with the big names in U.S. retail banking Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co. Spain's Banco Santander SA is also said to be interested. There is no harm in looking. In fact, all the Canadian banks and insurers should be looking at U.S. acquisitions.But the winning bidders for WaMu will be the bank that shoulders the most balance sheet risk, while at the same time convincing the U.S. taxpayer to soak up a considerable amount of toxic assets. That balancing act will require considerable political goodwill from folks like Senator Schumer. Citi or JP Morgan are far better positioned to tap that support than a bank from Toronto or Madrid
Then there's foreign participation in the bailout fund. The citizens of Buffalo already miffed about losing their football team to Toronto once a season. Now they're going to subsidize Toronto's banks, too? You can just see New York Senator Chuck Schumer, who runs the key finance committee, going ballistic on this one.
Which brings us to WaMu, sickest of the U.S. regional banks, and arguably the most attractive target. Seattle-based WaMu has a huge branch network and an equally huge portfolio of mortgages and loans - $309-billion, with a substantial amount of these assets impaired.WaMu formally went on the auction block last week. While the bank's board insists they have enough liquidity to keep rolling in the short-term, it's clear that in the not too distant future, WaMu is going to be tapping the bailout fund, big time. Back-of-an envelope estimates by one fund manager have WaMu needing to sell $40-billion of bad mortgages. TD Bank is reported to be kicking tires at this bank along with the big names in U.S. retail banking Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co. Spain's Banco Santander SA is also said to be interested. There is no harm in looking. In fact, all the Canadian banks and insurers should be looking at U.S. acquisitions.But the winning bidders for WaMu will be the bank that shoulders the most balance sheet risk, while at the same time convincing the U.S. taxpayer to soak up a considerable amount of toxic assets. That balancing act will require considerable political goodwill from folks like Senator Schumer. Citi or JP Morgan are far better positioned to tap that support than a bank from Toronto or Madrid
Goldman Sachs or Morgan Stanley could continue to function as an independent investment banks — something competitors including Bear Stearns, Lehman
Goldman Sachs and Morgan Stanley have established their gilded reputations advising companies how to remake themselves, often in hostile environments.Only a week ago, both were insisting that their fundamental strategies were fine. As a punishing market took down their competitors one by one, executives of the leading investment houses were resisting calls to become more like banks. Doing so, they warned, might make them and the entire American financial system less nimble, less creative — and less willing to take the big risks that reaped big rewards.Now, the surprising weekend metamorphosis of both into regulated bank holding companies capable of acquiring other banks has transformed Wall Street into an arena of greater stability, less complexity — and smaller profits, at least compared with the eye-popping standards that had created a golden era of $50 million bonuses for top traders and bankers.“I think it means a tamer Wall Street and profits that are smaller but probably less volatile. I do think this probably curbs their entrepreneurial initiative,” Samuel L. Hayes, emeritus professor of investment banking at Harvard, told The Times. “But that was going to happen anyway.”The announcements also leave the industry looking similar to its framework in the 1930s, before the Glass-Steagall Act separated investment banking from commercial banking. Morgan Stanley moved quickly into the new era on Monday, announcing plans to sell up to a 20 percent stake in itself to the Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion.Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Morgan Stanley had $36 billion in bank deposits as of Aug. 31 and also said it planned to add more by offering new retail banking services to clients and by making acquisitions.
Goldman Sachs, whose former chairman, Henry M. Paulson Jr., has in his present role of Treasury secretary commandeered the current rescue of America’s troubled financial system, is also expected to increase its deposit base.Private equity money might also come to the rescue, after the Federal Reserve on Monday announced changes to rules that would allow these firms and other minority investors to own up to 33 percent of a bank’s equity up from 25 percent, as long as their voting block was less than 15 percent of shares. And these investors can for the first time openly influence decisions at the banks in which they invest.Investors reacted more positively to Morgan Stanley’s shift on Monday, pushing the bank’s shares down 12 cents, or 0.4 percent, to $27.09 after being in free fall last week. Shares of Goldman fell $9.02, or 7 percent, to $120.78, a move analysts attributed to the bank not announcing any new capital infusion.Lucas Van Praag, a spokesman for Goldman Sachs, told The Times that the bank had no immediate plans to raise more capital, although it could do so to finance the acquisition of assets it viewed as attractive.
Both Morgan Stanley and Goldman Sachs already took customer deposits. Goldman, which will become the fourth-largest bank holding company, has $20 billion in deposits spread between the United States and Europe. The bank plans to move assets from other businesses, including its current lending business, giving it $150 billion in deposits. It also plans to widen its business through acquisitions and by attracting more high net-worth investing clients.Both banks may have to shed some assets to come into compliance with the rules that govern bank holding companies. For instance, they may have to sell commodity production facilities like power plants that they have owned in the past. But they will have up to five years to dispose of the assets and may be able to keep them in private equity subsidiaries.If Goldman Sachs and Morgan Stanley were voracious in the world of investment banking, their focus on commercial banking could introduce new competition for existing commercial banks like Citigroup, JPMorgan Chase and Bank of America, as well as smaller regional banks who will have to contend with two new giants on their doorstep.The new face of investment banking also threatens to eat away at the industry’s appeal among workers. The record bonuses of recent years at Wall Street firms look to be a thing of the past as firms like Goldman and Morgan Stanley lower their leverage and ability to produce stunning profits in areas like proprietary trading. slim bonuses this year, the value of workers’ savings in company stocks has plummeted at nearly every company on Wall Street. Commercial bank stocks do not tend to soar upward as fast as investment banking stocks and workers at the fallen investment banks are now worried their new parent companies’ structures will slow the rise of their stocks.
Analysts said the real test for both firms would come if markets improved and opportunities to pump up profits returned.“There is no way to argue that they are going to be as profitable as they were before this,” Meredith Whitney, an analyst at CIBC Oppenheimer, told The Times. “There is a tremendous amount of regulatory scrutiny, micromanaging and red tape, and rightly so, that is part of the process in relation to taking in retail deposits. These guys will have a full-time highly involved chaperone in all of their activities.”
The final decisions were essentially forced over the weekend as investors grew increasingly skeptical that either Goldman Sachs or Morgan Stanley could continue to function as an independent investment banks — something competitors including Bear Stearns, Lehman Brothers and Merrill Lynch could not achieve. Hedge funds also started moving balances away from both banks, a shift that might also have spurred the change in status, according to analysts.According to Mr. Hayes, after resisting change, Goldman Sachs and Morgan Stanley realized they would ultimately be subject to greater regulatory oversight no matter what they did. “Goldman and Morgan went to the Fed and said ‘we want to be regulated by you?’ ” said Richard Portes, a professor of economics at the London Business School and president of the Center for Economic Policy Research. “Give me a break. They knew they’d have to accept increased regulation and lower levels of leverage. Given that, why not have the security that goes with it?”
Goldman Sachs, whose former chairman, Henry M. Paulson Jr., has in his present role of Treasury secretary commandeered the current rescue of America’s troubled financial system, is also expected to increase its deposit base.Private equity money might also come to the rescue, after the Federal Reserve on Monday announced changes to rules that would allow these firms and other minority investors to own up to 33 percent of a bank’s equity up from 25 percent, as long as their voting block was less than 15 percent of shares. And these investors can for the first time openly influence decisions at the banks in which they invest.Investors reacted more positively to Morgan Stanley’s shift on Monday, pushing the bank’s shares down 12 cents, or 0.4 percent, to $27.09 after being in free fall last week. Shares of Goldman fell $9.02, or 7 percent, to $120.78, a move analysts attributed to the bank not announcing any new capital infusion.Lucas Van Praag, a spokesman for Goldman Sachs, told The Times that the bank had no immediate plans to raise more capital, although it could do so to finance the acquisition of assets it viewed as attractive.
Both Morgan Stanley and Goldman Sachs already took customer deposits. Goldman, which will become the fourth-largest bank holding company, has $20 billion in deposits spread between the United States and Europe. The bank plans to move assets from other businesses, including its current lending business, giving it $150 billion in deposits. It also plans to widen its business through acquisitions and by attracting more high net-worth investing clients.Both banks may have to shed some assets to come into compliance with the rules that govern bank holding companies. For instance, they may have to sell commodity production facilities like power plants that they have owned in the past. But they will have up to five years to dispose of the assets and may be able to keep them in private equity subsidiaries.If Goldman Sachs and Morgan Stanley were voracious in the world of investment banking, their focus on commercial banking could introduce new competition for existing commercial banks like Citigroup, JPMorgan Chase and Bank of America, as well as smaller regional banks who will have to contend with two new giants on their doorstep.The new face of investment banking also threatens to eat away at the industry’s appeal among workers. The record bonuses of recent years at Wall Street firms look to be a thing of the past as firms like Goldman and Morgan Stanley lower their leverage and ability to produce stunning profits in areas like proprietary trading. slim bonuses this year, the value of workers’ savings in company stocks has plummeted at nearly every company on Wall Street. Commercial bank stocks do not tend to soar upward as fast as investment banking stocks and workers at the fallen investment banks are now worried their new parent companies’ structures will slow the rise of their stocks.
Analysts said the real test for both firms would come if markets improved and opportunities to pump up profits returned.“There is no way to argue that they are going to be as profitable as they were before this,” Meredith Whitney, an analyst at CIBC Oppenheimer, told The Times. “There is a tremendous amount of regulatory scrutiny, micromanaging and red tape, and rightly so, that is part of the process in relation to taking in retail deposits. These guys will have a full-time highly involved chaperone in all of their activities.”
The final decisions were essentially forced over the weekend as investors grew increasingly skeptical that either Goldman Sachs or Morgan Stanley could continue to function as an independent investment banks — something competitors including Bear Stearns, Lehman Brothers and Merrill Lynch could not achieve. Hedge funds also started moving balances away from both banks, a shift that might also have spurred the change in status, according to analysts.According to Mr. Hayes, after resisting change, Goldman Sachs and Morgan Stanley realized they would ultimately be subject to greater regulatory oversight no matter what they did. “Goldman and Morgan went to the Fed and said ‘we want to be regulated by you?’ ” said Richard Portes, a professor of economics at the London Business School and president of the Center for Economic Policy Research. “Give me a break. They knew they’d have to accept increased regulation and lower levels of leverage. Given that, why not have the security that goes with it?”
Monday, 15 September 2008
Shares in national banks fell across the board in early trading Monday, with Bank of America Corp. and Washington Mutual Inc. pacing the declines
Shares in national banks fell across the board in early trading Monday, with Bank of America Corp. and Washington Mutual Inc. pacing the declines, as the broader market lurched after two storied investment banks were taken out in the worsening financial crisis.Bank of America dragged on the sector after it announced late Sunday a deal to buy investment bank Merrill Lynch & Co. for $50 billion.
Investors sold the stock briskly, which is often the case when a company spends heavily on an acquisition because of the short-term costs and difficulties of integrating two disparate businesses.The bank's shares slid $4.62, or 14 percent, to $29.12 in early trading.Merrill made the move to potentially avoid the worse fate of Lehman Brothers Holdings Inc., which was forced to file for Chapter 11 bankruptcy protection early Monday.Washington Mutual Inc. continued its multiday decline, dropping another 15 percent to $2.31 early Monday, on concerns that it may not have enough credit to weather the financial crisis.All of the moves were triggered by exposure to risky mortgage loans that left investors scrambling to assess individual banks' exposure.
Investors sold the stock briskly, which is often the case when a company spends heavily on an acquisition because of the short-term costs and difficulties of integrating two disparate businesses.The bank's shares slid $4.62, or 14 percent, to $29.12 in early trading.Merrill made the move to potentially avoid the worse fate of Lehman Brothers Holdings Inc., which was forced to file for Chapter 11 bankruptcy protection early Monday.Washington Mutual Inc. continued its multiday decline, dropping another 15 percent to $2.31 early Monday, on concerns that it may not have enough credit to weather the financial crisis.All of the moves were triggered by exposure to risky mortgage loans that left investors scrambling to assess individual banks' exposure.
UBS and Credit Suisse have joined forces with eight of the globe's biggest banks to create a $70 billion (SFr78 billion) fund designed to bail out??
UBS and Credit Suisse have joined forces with eight of the globe's biggest banks to create a $70 billion (SFr78 billion) fund designed to help keep each other afloat.
The two Swiss banks agreed on Sunday to contribute $7 billion each toward the fund. Other contributors include Deutsche Bank, Bank of America, Barclays and Citigroup.
Should any bank in the consortium need emergency cash, each member would be permitted to borrow about $23 billion, or one-third of the fund's total allotment. That figure could grow as more banks contribute to the fund. The news comes as US investment giant Lehman Brothers filed for bankruptcy. Merrill Lynch was potentially spared the same fate when Bank of America announced it would buy that firm for $50 billion. A report on Sunday in the Zurich newspaper, SonntagsZeitung, suggested that UBS, Switzerland's largest bank, might write off SFr5 billion ($4.5 billion) in losses for the second half of 2008.
The two Swiss banks agreed on Sunday to contribute $7 billion each toward the fund. Other contributors include Deutsche Bank, Bank of America, Barclays and Citigroup.
Should any bank in the consortium need emergency cash, each member would be permitted to borrow about $23 billion, or one-third of the fund's total allotment. That figure could grow as more banks contribute to the fund. The news comes as US investment giant Lehman Brothers filed for bankruptcy. Merrill Lynch was potentially spared the same fate when Bank of America announced it would buy that firm for $50 billion. A report on Sunday in the Zurich newspaper, SonntagsZeitung, suggested that UBS, Switzerland's largest bank, might write off SFr5 billion ($4.5 billion) in losses for the second half of 2008.
The world's major couterparties on the $US455 trillion derivatives market go into technical default and no one is sure what is going to happen.
The world's major couterparties on the $US455 trillion derivatives market go into technical default and no one is sure what is going to happen.Lehman Bros yesterday formally petitioned the State Bankruptcy Court of the Southern District Court of New York for Chapter 11 protection. Lehman would also have filed what are called "first day motions", which allow the bank to pay salaries and wages, while it continues to market its non-toxic, broker-dealer operations and work out what on earth to do with its highly toxic $US53 billion residential and commercial mortgage portfolio.
But, as scary and Spartan as it might sound, failure is as essential to the workings of an effective marketplace as is success. Which means only that, given this shattered, battle-weary investment bank is unable to find itself a new owner or think its own way through the current calamitous circumstances, then one of the legendary brands of Wall Street should be left to fail. In a weekend of unprecedented drama, the Fed seems to have been forced to play Solomon and choose between Merrill Lynch and Lehman. Both were facing mortal threat. But it seems only one could survive intact. So, the Fed seems to have shifted Bank of America's sights away from the arguably unsalvageable Lehman and onto the bigger and more systemically important Merrill Lynch. It was the right choice. Mind you, there are some more tough ones ahead for the Fed, not least of them being how to respond to the request from US insurer AIG for $US40 billion in emergency assistance.
AIG is reported to have but days to survive. The rating agencies, bless them, have threatened to downgrade AIG's credit if it cannot raise $US40 billion by Monday. The company has been in unsuccessful negotiations with KKR, TPG and J.C. Flowers. But the price, so far, has not been right. But as the risks mount, so will the pressure to surrender. The predators are playing it very tough indeed in their quest for bargains. In the 13 months since the sub-prime crisis froze US credit markets, three of the world's top five independent investment banks have essentially failed, while the US Government has assumed control of mortgage twins Fanny Mae and Freddie Mac.
Of Wall Street's big five independents, only two are now left standing, Goldman Sachs and Morgan Stanley. Both must be wondering whether it is the model that is broken here. Now, if you had said 18 months ago that three US investment banks would fail or be forced into shot-gun marriages to avoid failure, people would have looked at you like you had two heads. Particularly if those people worked in the investment banking sector. But nothing in that sector is certain any more. Of the two remaining independents, Goldman Sachs remains steadfastly aloof from sub-prime's deathly creep because it closed out all its paper positions ahead of the credit crunch. At least that's what it believes. Morgan Stanley, on the other hand, is still a player in the potential lethal shadow markets, but seems currently to sailing in comparatively clear air. And then there is Lehman Bros. It will now likely be dismembered by the Wall Street wolves. The prices will be low and the cost to the banking system and Lehman shareholders quite frightening. According to the senior work-out specialist with one of Australia's so far insulated Four Pillars, the global banking system has now "drifted into unchartered waters". "What we know, well, what we believe we know at least, is that is that Lehman is in the top 10 players in the global credit default swap market. "What we don't know is how many trades that equates to. And that means we do not really have any way of anticipating the short-term impact on that market as it opens in Europe overnight and the US this morning.
"But you can expect massive two-way pricings as counterparties move to close-out trades currently being held with Lehmans. What will flow from that, well, who knows. But certainly you can expect another round of big losses to be brought to book in the next batch of quarterlys in the States." The problem in making predictions here is that a counterparty the size of Lehmans has never failed before. It is that simple. The hope, expressed with typical confidence on Sunday by none other than Alan Greenspan, is that there will be an orderly liquidation and wind-down of Lehman with the usual suspects, the US hedge funds and private equity buyout merchants, picking the eyes out of what still has value. That makes some sense given that the one thing everyone agrees on is that, whatever Lehman was worth on Friday, it is worth a lot less now. But there isn't much else to make a bet on here.
There remain two distinctly divergent schools of thought on the ramifications of the collapse of an organisation as pivotal to the synthetic securities markets as Lehman is. The likes of Warren Buffett would have it that the defaults triggered by Lehman's implosion would resound fearfully through the multi-trillion-dollar derivatives market, generating a global, capital-burning bushfire in global markets.
Then there are those who believe the systemic risk in the $US455 trillion derivatives market has been overcooked. But even those who maintain a less cataclysmic view than Omaha's Oracle accept that a major default event like the collapse of the 158 year old Lehman will result in massive value burn. And there will be hot-spots in unexpected places -- like, for example, a sad selection of deluded Australian councils and public works authorities that disgracefully figured derivatives were a good place to put public monies. The fact that banks around the globe spent the weekend re-assessing their position says everything about the latent potential for systemic unravelling. As does the Fed's decision to busy itself over the weekend with, among it other tasks, the creation of a $US100 billion liquidity dyke to secure against the risk of the sort of counter-party default tsunami Buffett has so often warned of. Up to 10 senior US banks are reported to have pledged to support the emergency fund. What every bank in the world will be doing right now is assessing where Lehman stood as counter-party. The trades you then will be most concerned to identify will be those where they have acquired protection and Lehman is the protection seller.
Where that has happened, there will be tremendous concern because that protection simply no longer exists. "Fear is ruling the market," another senior banker said yesterday. "Nobody knows what is going to happen and nobody is trusting anyone." And what, you might sensibly ask, does all this mean for Australian's banking system? If you believe the markets, it means a fair bit, given $4.6 billion was lopped from the market value of the Big Four in the wake of uncertainty's dramatic return.
But if you believe the banks themselves, it doesn't mean a whole lot, at least not yet. The consensus is that our pillars have, at very worst, non-material exposures to Lehman here or in the US and that their exposures to counterparty risk are similarly immaterial. The bigger issue for our banks, given their umbilical dependence on global capital markets to fund their lending, is how the weekend's ordeal at Lehman, Merrily Lynch and AIG play out in global credit markets over the medium term.
But, as scary and Spartan as it might sound, failure is as essential to the workings of an effective marketplace as is success. Which means only that, given this shattered, battle-weary investment bank is unable to find itself a new owner or think its own way through the current calamitous circumstances, then one of the legendary brands of Wall Street should be left to fail. In a weekend of unprecedented drama, the Fed seems to have been forced to play Solomon and choose between Merrill Lynch and Lehman. Both were facing mortal threat. But it seems only one could survive intact. So, the Fed seems to have shifted Bank of America's sights away from the arguably unsalvageable Lehman and onto the bigger and more systemically important Merrill Lynch. It was the right choice. Mind you, there are some more tough ones ahead for the Fed, not least of them being how to respond to the request from US insurer AIG for $US40 billion in emergency assistance.
AIG is reported to have but days to survive. The rating agencies, bless them, have threatened to downgrade AIG's credit if it cannot raise $US40 billion by Monday. The company has been in unsuccessful negotiations with KKR, TPG and J.C. Flowers. But the price, so far, has not been right. But as the risks mount, so will the pressure to surrender. The predators are playing it very tough indeed in their quest for bargains. In the 13 months since the sub-prime crisis froze US credit markets, three of the world's top five independent investment banks have essentially failed, while the US Government has assumed control of mortgage twins Fanny Mae and Freddie Mac.
Of Wall Street's big five independents, only two are now left standing, Goldman Sachs and Morgan Stanley. Both must be wondering whether it is the model that is broken here. Now, if you had said 18 months ago that three US investment banks would fail or be forced into shot-gun marriages to avoid failure, people would have looked at you like you had two heads. Particularly if those people worked in the investment banking sector. But nothing in that sector is certain any more. Of the two remaining independents, Goldman Sachs remains steadfastly aloof from sub-prime's deathly creep because it closed out all its paper positions ahead of the credit crunch. At least that's what it believes. Morgan Stanley, on the other hand, is still a player in the potential lethal shadow markets, but seems currently to sailing in comparatively clear air. And then there is Lehman Bros. It will now likely be dismembered by the Wall Street wolves. The prices will be low and the cost to the banking system and Lehman shareholders quite frightening. According to the senior work-out specialist with one of Australia's so far insulated Four Pillars, the global banking system has now "drifted into unchartered waters". "What we know, well, what we believe we know at least, is that is that Lehman is in the top 10 players in the global credit default swap market. "What we don't know is how many trades that equates to. And that means we do not really have any way of anticipating the short-term impact on that market as it opens in Europe overnight and the US this morning.
"But you can expect massive two-way pricings as counterparties move to close-out trades currently being held with Lehmans. What will flow from that, well, who knows. But certainly you can expect another round of big losses to be brought to book in the next batch of quarterlys in the States." The problem in making predictions here is that a counterparty the size of Lehmans has never failed before. It is that simple. The hope, expressed with typical confidence on Sunday by none other than Alan Greenspan, is that there will be an orderly liquidation and wind-down of Lehman with the usual suspects, the US hedge funds and private equity buyout merchants, picking the eyes out of what still has value. That makes some sense given that the one thing everyone agrees on is that, whatever Lehman was worth on Friday, it is worth a lot less now. But there isn't much else to make a bet on here.
There remain two distinctly divergent schools of thought on the ramifications of the collapse of an organisation as pivotal to the synthetic securities markets as Lehman is. The likes of Warren Buffett would have it that the defaults triggered by Lehman's implosion would resound fearfully through the multi-trillion-dollar derivatives market, generating a global, capital-burning bushfire in global markets.
Then there are those who believe the systemic risk in the $US455 trillion derivatives market has been overcooked. But even those who maintain a less cataclysmic view than Omaha's Oracle accept that a major default event like the collapse of the 158 year old Lehman will result in massive value burn. And there will be hot-spots in unexpected places -- like, for example, a sad selection of deluded Australian councils and public works authorities that disgracefully figured derivatives were a good place to put public monies. The fact that banks around the globe spent the weekend re-assessing their position says everything about the latent potential for systemic unravelling. As does the Fed's decision to busy itself over the weekend with, among it other tasks, the creation of a $US100 billion liquidity dyke to secure against the risk of the sort of counter-party default tsunami Buffett has so often warned of. Up to 10 senior US banks are reported to have pledged to support the emergency fund. What every bank in the world will be doing right now is assessing where Lehman stood as counter-party. The trades you then will be most concerned to identify will be those where they have acquired protection and Lehman is the protection seller.
Where that has happened, there will be tremendous concern because that protection simply no longer exists. "Fear is ruling the market," another senior banker said yesterday. "Nobody knows what is going to happen and nobody is trusting anyone." And what, you might sensibly ask, does all this mean for Australian's banking system? If you believe the markets, it means a fair bit, given $4.6 billion was lopped from the market value of the Big Four in the wake of uncertainty's dramatic return.
But if you believe the banks themselves, it doesn't mean a whole lot, at least not yet. The consensus is that our pillars have, at very worst, non-material exposures to Lehman here or in the US and that their exposures to counterparty risk are similarly immaterial. The bigger issue for our banks, given their umbilical dependence on global capital markets to fund their lending, is how the weekend's ordeal at Lehman, Merrily Lynch and AIG play out in global credit markets over the medium term.
European Central Bank is to pump 30 billion euros into the financial markets to calm them.
European Central Bank is to pump 30 billion euros into the financial markets to calm them. The move follows Monday morning falls on the European stock exchanges in the wake of problems caused by the credit crisis at two of the United States' largest investment banks. Lehman Brothers is currently filing for bankruptcy, while Merrill Lynch, often seen as a Wall Street giant too big to fail, is being taken over by Bank of America.The damage, seen mainly in the morning, proved to be less than expected, especially when the New York stock exchange opened with no sign of a "Black Monday". When the European exchanges finally closed, losses amounted to between three and four percent.In the US, the Federal Reserve is also intervening to curb the rising unrest in the financial markets by easing restrictions on access to emergency credit. In addition, ten large international banks have set aside 70 billion dollars to help stabilise the markets.
The Fed auctioned $25 billion worth of 84-days loans to banks.
Federal Reserve has auctioned another $25 billion in loans to squeezed banks to help them overcome credit problems.The central bank on Wednesday released the results of its most recent auction. It's part of an ongoing program started in December that seeks to ease financial turmoil and credit stresses. Those programs — along with the depressed housing market — have shaken the economy, forcing companies and people to clamp down.In the latest auction, commercial banks paid an interest rate of 2.530 percent for the 28-day loans. There were 53 bidders. The Fed received bids for $46.24 billion worth of the loans.The Fed auctioned $25 billion worth of 84-days loans to banks.The Fed in mid-December announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and help them over the credit hump. In late July, the Fed expanded the program, making the longer 84-day loans available, besides the existing 28-day loans.
The worst global credit crisis seen in decades has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses.
The smooth flow of credit is the economy's oxygen. It permits people to finance big-ticket purchases, such as homes and cars, and helps businesses expand operations and hire workers.
The worst global credit crisis seen in decades has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses.
The smooth flow of credit is the economy's oxygen. It permits people to finance big-ticket purchases, such as homes and cars, and helps businesses expand operations and hire workers.
China's decision to cut rates points to escalating concerns about a slowdown in economic growth.
Turmoil engulfed global financial markets in the wake of an unprecedented shakeup on Wall Street that saw Lehman Brothers (LEH:Lehman Brothers Holdings Inc"Lehman et al. do not have any direct impact upon China's banks -- exposures to them in the Chinese banking system are small, but the fear must be about the medium-term impact through the real economy, and of investors just selling out of panic," Green said. "This is the strongest positive message the market has seen in ages from Beijing."
Chinese officials appear to perceive inflation as a "less serious threat," particularly considering the decline in commodities prices in recent weeks, Green said. Other analysts agreed that China's decision to cut rates points to escalating concerns about a slowdown in economic growth.
Flemming Nielsen, senior analyst at Danske Bank, said that the Chinese government is "shifting its focus from fighting inflation to stimulating growth."
The recent sharp decline in consumer price index inflation has made this policy shift possible, Nielsen said in a research note. CPI in August declined below 5% from the year before and is likely to decline further below 4% in early 2009, he said.
"The macroeconomic picture currently is growth moderation rather than a sharp contraction, and the underlying inflationary pressure should not be underestimated," Nielsen said. "Thus it would be premature to expect major fiscal easing soon."
Diana Choyleva, an analyst at Lombard Street Research, was critical of the central bank's move.
"China's surprise policy rate cut is bad news," Choyleva said in a research note. "The authorities have switched their priority from fighting inflation to supporting growth when there is no clear evidence either that the economy's overheating has been curbed or that there has been a marked growth slowdown."
While headline inflation has declined, producer and core price inflation are still rising, she said. In addition, China controls some key prices, such as those of energy, education and medicine. Broad money and credit growth continue to be robust.
Chinese officials appear to perceive inflation as a "less serious threat," particularly considering the decline in commodities prices in recent weeks, Green said. Other analysts agreed that China's decision to cut rates points to escalating concerns about a slowdown in economic growth.
Flemming Nielsen, senior analyst at Danske Bank, said that the Chinese government is "shifting its focus from fighting inflation to stimulating growth."
The recent sharp decline in consumer price index inflation has made this policy shift possible, Nielsen said in a research note. CPI in August declined below 5% from the year before and is likely to decline further below 4% in early 2009, he said.
"The macroeconomic picture currently is growth moderation rather than a sharp contraction, and the underlying inflationary pressure should not be underestimated," Nielsen said. "Thus it would be premature to expect major fiscal easing soon."
Diana Choyleva, an analyst at Lombard Street Research, was critical of the central bank's move.
"China's surprise policy rate cut is bad news," Choyleva said in a research note. "The authorities have switched their priority from fighting inflation to supporting growth when there is no clear evidence either that the economy's overheating has been curbed or that there has been a marked growth slowdown."
While headline inflation has declined, producer and core price inflation are still rising, she said. In addition, China controls some key prices, such as those of energy, education and medicine. Broad money and credit growth continue to be robust.
U.S. brokerage firm Lehman Brothers slipped into bankruptcy and venerable investment house Merrill Lynch & Co. was bought out by Bank of America Corp
U.S. brokerage firm Lehman Brothers slipped into bankruptcy and venerable investment house Merrill Lynch & Co. was bought out by Bank of America Corp., both moves the result of large losses in the mortgage-backed commercial paper market.
Lehman Brothers' bankruptcy forced central banks to inject cash into the global financial system. (Jin Lee/Associated Press)
Earlier this year, Bear Stearns was taken over in a similar financial rescue as the brokerage firm faced a debt-related bankruptcy, again driven by bad mortgage-backed investments.As the crisis among investment houses grew, analysts were concerned that companies, such as giant insurer American International Group Inc. [AIG] reportedly seeking as much as $40 billion US to recapitalize its balance sheet, would not be able to find sufficient available cash to avoid bankruptcy.Last week, the ECB renewed an outstanding credit facility worth in the range of $106 billion, a sign that the central bank wanted to increase existing liquidity available to financial institutions.In addition, the ECB said Monday it received $127 billion worth of bids for its available short-term cash, a signal of strong demand for the money among private-sector firms.In a brief statement, the bank said it "stands ready to contribute to orderly conditions in the euro money market."
Similarly, the Bank of England offered $9 billion in short-term cash but received almost five times that amount, or $43 billion, in bids, another signal of the desperate scramble among the financial sector for cash.
Also on Monday, the U.S. Federal Reserve said it would allow mortgage-backed paper to be used as collateral for firms borrowing from the central bank. Previously, the U.S. Fed forced companies to pledge investment-grade securities in return for borrowing its cash.The Fed move followed a similar shift by the Bank of Canada last week. Canada's central bank relaxed the type of assets it would accept from financial companies accessing its cash pools.Finally, on Sunday, a global consortium of 10 banks announced a pool of $70 billion to lend to troubled financial companies.
All of these measures are designed to give lenders confidence that companies faced with high levels of asset-backed commercial paper will have access to sufficient financial reserves to be able to keep their doors open.Without such reassurances, lending institutions might be tempted to call in their outstanding loans in an effort to get their cash out of the ailing company before a bankruptcy.
Lehman Brothers' bankruptcy forced central banks to inject cash into the global financial system. (Jin Lee/Associated Press)
Earlier this year, Bear Stearns was taken over in a similar financial rescue as the brokerage firm faced a debt-related bankruptcy, again driven by bad mortgage-backed investments.As the crisis among investment houses grew, analysts were concerned that companies, such as giant insurer American International Group Inc. [AIG] reportedly seeking as much as $40 billion US to recapitalize its balance sheet, would not be able to find sufficient available cash to avoid bankruptcy.Last week, the ECB renewed an outstanding credit facility worth in the range of $106 billion, a sign that the central bank wanted to increase existing liquidity available to financial institutions.In addition, the ECB said Monday it received $127 billion worth of bids for its available short-term cash, a signal of strong demand for the money among private-sector firms.In a brief statement, the bank said it "stands ready to contribute to orderly conditions in the euro money market."
Similarly, the Bank of England offered $9 billion in short-term cash but received almost five times that amount, or $43 billion, in bids, another signal of the desperate scramble among the financial sector for cash.
Also on Monday, the U.S. Federal Reserve said it would allow mortgage-backed paper to be used as collateral for firms borrowing from the central bank. Previously, the U.S. Fed forced companies to pledge investment-grade securities in return for borrowing its cash.The Fed move followed a similar shift by the Bank of Canada last week. Canada's central bank relaxed the type of assets it would accept from financial companies accessing its cash pools.Finally, on Sunday, a global consortium of 10 banks announced a pool of $70 billion to lend to troubled financial companies.
All of these measures are designed to give lenders confidence that companies faced with high levels of asset-backed commercial paper will have access to sufficient financial reserves to be able to keep their doors open.Without such reassurances, lending institutions might be tempted to call in their outstanding loans in an effort to get their cash out of the ailing company before a bankruptcy.